HNI Corporation (NYSE: HNI) announced Q3 2014 earnings on Wednesday.
Sales for the third quarter ended September 27, 2014, were $614.7 million, above estimates of $593.27 million and above the $565.71 million reported for the same period in...

Shareholders of HNI Corp (NYSE: HNI) looking to boost their income beyond the stock's 2.6% annualized dividend yield can sell the January 2015 covered call at the $40 strike and collect the premium based on the $1.55 bid, which annualizes to an...

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HNI Corporation (NYSE:HNI) is the second-largest maker of office furniture in the world with a 16% market share of the industry. It is also the largest manufacturer of fireplaces and stoves, capturing 30% share of the $1.5 billion U.S. hearth products market[1]. The sale of office furniture accounted for the majority (83%) of HNI's total revenue, while sale of hearth products made up the remaining 17%.[2]

Since HNI's core product is office furniture, its revenues are heavily influenced by new office construction or renovation as well as employment growth or decline. In an economic downcycle, office properties see slower growth, and this hurts HNI's overall sales. HNI has countered slow U.S. sales with an expansion effort overseas. In 2006 HNI acquired Lamex, a Chinese manufacturer of office furniture, in order to take advantage of the Chinese market for office furniture that is at $3B and growing.[3] As HNI tries to gain share in international markets, however, it faces challenges in its domestic market- the percentage of office furniture imports to the U.S. (as a percentage of total consumption) increased from 14% to 19%, while exports stayed at around 3%-4%. Low-cost imports from Asian countries, especially China, threaten to take away HNI's strength, its ability to sell products at lower cost than other domestic competitors.[4].

HNI mainly sells its office furniture products through dealers, wholesalers, and retail superstores to government, education and health care organizations, large corporations, small businesses and individual consumers. Individual consumers and small businesses buy HNI's products through retail superstores such as Staples, Officemax (OMX), Office Depot (ODP), and Corporate Express, while large government and corporate accounts are mostly handled by office furniture dealers. HNI's revenues are split fairly evenly between the two main types of office furniture customers - the contract segment and the commercial segment. The contract segment includes large corporations that buy office furniture for new office facilities, relocations and office redesigns. These customers often need custom-designed furniture. The commercial segment includes smaller orders of office furniture purchased by small businesses and home office users. The office furniture market is influenced by the general economic outlook, corporate profits, new office construction and white-collar employment.

HNI's hearth products are sold through dealers, distributors and company-owned retail outlets to home construction companies, builders and individual customers. The company sells approximately 70% of its products to the constructors and builders of new homes. Hearth products are typically purchased by builders during the construction of new homes, and homeowners during the renovation of existing homes. The market is thus sensitive to new home construction and remodeling projects and is heavily influenced by the general housing market.

Business Segments

The office furniture segment manufactures and markets a broad line of metal and wood commercial and home office furniture which includes storage products, desks, credenzas, chairs, tables, bookcases, freestanding office partitions and panel systems and other related products.[5]

Key Trends and Forces

The economic slow down caused by the 2007 subprime mortgage crisis has lead to decreasing corporate profits, especially for banks and real estate firms. This will affect the demand for office furniture, as office furniture purchases depend heavily on new office construction, renovation and employment.

The recent subprime mortgage crisis has greatly affected the U.S. housing market, leading to plummeting housing prices and consumer confidence. As 70% of HNI's hearth products are purchased for new homes, this lowers demand for HNI's hearth products and affects the company's net sales.[6]

The percentage of office furniture imports to the U.S. (as a percentage of total consumption) increased from 14% to 19%, while exports stayed at around 3%-4%. This trend is expected to continue as low-cost imports from Asian countries, especially China, rise[7]. As HNI's primary strength is their ability to sell their products at a lower cost than domestic competitors, these low-cost imports will compete with HNI's share of the U.S. market.

HNI's acquisition of Lamex opens up opportunities for further growth in China

China's office furniture market, estimated at $2.5 to $3 billion[8], is one of the fastest growing in the world. The market demand for new offices and new office furniture in China is expected to rise even more with the recent construction boom in China's major cities (which has lead to more prime office space), zero import tariffs for furniture, and a GDP growth rate that remains at 10%[9]. As HNI acquired Lamex, a Chinese manufacturer of office furniture, in 2006, HNI will be able to use Lamex’s strong local presence to expand their sales in China. Lamex already has showrooms and sales offices in Hong Kong, Shanghai and Beijing and a network of franchisees throughout Mainland China. This opportunity to expand in the Chinese market would then lead to increased revenues for HNI.

Competition

The office furniture industry is highly competitive, and the low-cost niche market that HNI competes in is particularly price sensitive. HNI's main competitors in the office furniture industry include manufacturers Steelcase, Haworth, Herman Miller, Knoll, and Kimball International.

In the hearth products industry, HNI primarily competes against other large manufacturers including Travis Industries and Lennox International.

Steelcase : Steelcase is a designer and manufacturer of office furniture and complementary products and services, including furniture systems, storage, seating, tables, textiles, desks, interior architecture services, lighting and infrastructure. The company sells its products under the brands of Steelcase, Designtex, Brayton, Vecta, Metro and PolyVision[10].

Herman Miller : Herman Miller manufactures and distributes interior furnishings for use in various environments, including office, healthcare, educational and residential settings.

Knoll: Knoll is a designer and manufacturer of office furniture products, textiles and fine leathers.

Kimball International : Kimball provides products and services for both the furniture segment and the electronic contract assemblies segment. The furniture segment offers furniture for the office and hospitality industries, while the electronic contract assemblies segment provides engineering and manufacturing services to a variety of industries globally[11].

Lennox International: Lennox International designs and manufactures products for the heating, ventilation, air conditioning and refrigeration (HVACR) markets[12].